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- Not to be confused with private mortgage insurance (PMI), mortgage protection insurance (MPI) helps cover your mortgage payment if you die or become disabled and can't work.
- MPI is similar to life insurance, but the beneficiary is the deceased's mortgage lender.
- MPI is not as flexible as other types of insurance like disability insurance and life insurance.
As a homeowner, you pay for homeowners insurance to cover a variety of worst-case scenarios that can impact your property. Mortgage protection insurance (MPI) is a different type of safeguard that could be helpful if you’re unable to repay your mortgage. While that extra protection sounds good, MPI isn’t for everyone. Here’s when mortgage protection insurance is worth it.
What is mortgage protection insurance?
Mortgage protection insurance is an insurance policy that pays out in the event of your death or if you become disabled and can’t work. In that way, it functions similarly to life insurance and disability insurance. Unlike those types of insurance, however, the payment does not go to you or your heirs but goes directly to your mortgage lender to pay off the loan.
MPI policies in general only cover the principal and interest portion of a mortgage payment, so other fees like HOA dues, property taxes and homeowners insurance would still be your responsibility. You might be able to add a policy rider, however, to cover these expenses.
How does mortgage protection insurance work?
Mortgage protection insurance comes into effect when you die or become disabled, and it pays off the remainder of your mortgage. It works similarly to term life insurance in that you buy a policy for a length of time (often 10 to 30 years). People who sign up for MPI often have these terms coincide with how long they have left to pay off their mortgage.
Banks and lenders often sell MPI policies. As you pay off your mortgage, the insurance payout decreases, but the premiums stay the same. For many, this is a major detractor of MPI, but it can be easier to get MPI coverage than life insurance as there’s no medical evaluation required.
Mortgage protection insurance vs. life insurance
While MPI and life insurance both pay out benefits upon your death, life insurance is more flexible. The beneficiary of a life insurance policy is usually a family member, who can use the funds however they see fit. In the case of MPI, the beneficiary is your lender, who will only use the payout to eliminate the mortgage.
Life insurance companies also offer a wider range of coverage and premium policies. MPI limits coverage based on your property and personal health.
Differences between MPI, PMI and MIP
Mortgage protection insurance can easily be confused with another abbreviation, PMI, or private mortgage insurance. While the letters and terms for these insurance products are almost identical, they are distinctly different. As described above, MPI protects you; PMI protects the lender that loaned you your mortgage, and is required on conventional loans when the borrower puts less than 20 percent down.
To make all of this even more confusing, there is yet another acronym, MIP, which stands for mortgage insurance premium and applies to FHA loans. Like PMI, MIP protects the lender, not the borrower. However, unlike PMI, MIP cannot be removed on an FHA loan unless the borrower made a down payment of at least 10 percent. Here’s a recap:
- Mortgage protection insurance (MPI): This type of coverage pays out to your lender if you die or become disabled and can’t work.
- Private mortgage insurance (PMI): This type of coverage is usually required if your down payment is under 20 percent. It pays out to your lender if you were to become unable to pay your mortgage and default on the loan.
- Mortgage insurance premium (MIP): This is a version of mortgage insurance specific to FHA loans. It pays out to your lender if you default on the FHA mortgage.
Pros and cons of mortgage protection insurance
In general, mortgage protection insurance is only a good idea for people who can’t get approved for traditional forms of life or disability insurance, or for whom premiums for a traditional policy are cost-prohibitive. If you’re in that situation, here are some pros of mortgage protection insurance:
Pros of MPI
- Guaranteed acceptance: Most MPI policies are issued on a “guaranteed acceptance” basis. That can be advantageous for people who have health conditions and either have to pay high rates for life insurance or are struggling to obtain a policy.
- Peace of mind: An MPI policy that will make payments if you die or become disabled can provide you and your family with a sense of security.
Cons of MPI
Mortgage protection insurance is optional, and there are plenty of reasons to opt out or choose the flexibility of a traditional life insurance policy instead. Here are a few of the cons of MPI:
- More cash out of your pocket: The MPI premium adds more of a burden to your monthly budget.
- Limited benefits in some cases: If your mortgage is nearly paid off or you paid for the home with proceeds from the sale of another home, paying for an MPI policy is generally not a good use of your money. Rather, that money could be stashed away in an emergency fund or retirement portfolio. Additionally, if you plan to make extra payments to pay off your mortgage early, you might not benefit as much from MPI because the loan payoff amount decreases as the mortgage is paid down. (However, some of the newer MPI policies include what’s known as a level-death benefit, meaning that the payouts won’t decline.)
- Potentially better alternatives: Because MPI is paid directly to your lender, it won’t provide any financial protection to your loved ones if you die other than paying off your mortgage. A life insurance policy might make more sense because the policy is paid to your beneficiaries, who can then decide how to allocate the money, whether it’s to the mortgage or elsewhere. For non-smokers in good health, life insurance premiums are generally lower than those for MPI, as well.
Where to buy mortgage protection insurance
If you think MPI is an option for you, there are three general places to get it through:
- Your mortgage lender: Many lenders offer MPI directly to their borrowers. If you’re curious about MPI, contact your mortgage lender to see if it’s an option.
- A private insurance company: Several private insurance companies also offer MPI. Offerings can vary by location, so research what might be available to you.
- A life insurance provider: Many life insurance providers also offer MPI, sometimes referring to it as “mortgage life insurance.”
When shopping for MPI, remember to get at least three quotes to compare premiums and terms.
Mortgage protection insurance FAQ
MPI is not required, and not always a financially smart move. You can get similar coverage through a sufficient life insurance policy by using the DIME (debt, income, mortgage, education) method, which takes into account your mortgage when you decide how much life insurance to purchase.
The amount you’ll pay for mortgage protection insurance depends on a variety of factors including your age, how many years are left on your mortgage, the current balance of your mortgage and the amount of coverage you desire. According to the U.S. Department of Veterans Affairs Veterans Mortgage Life Insurance calculator, for a mortgage with 10 years remaining, a $100,000 balance and $100,000 of coverage: a 25-year-old will pay $5.03 per month; a 40-year-old will pay $10.25 per month; a 50-year-old will pay $17.37 per month; and a 65-year-old will pay $71.40 per month.
You can choose whether you need mortgage protection insurance and for how long you need it for. Terms generally range from 10 to 30 years. You might want your mortgage protection insurance term to be close in length to how long you have left to pay off your mortgage.
Canceling mortgage protection insurance is generally easy to do. In most cases, you need to contact your insurance provider, inform them of your plans to cancel and follow their instructions. Keep in mind, the process can vary by insurer, and they won’t repay you for any premiums you paid.